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How to Prepare for a Recession – 9 Ways to Protect Your Money & Finances


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The events of early 2020 were completely unexpected. No one could have predicted the coronavirus pandemic or the global recession that resulted from the decline in economic activity as countries struggled to control the spread of the virus.

But even if the cause of the recession was a surprise, the recession itself shouldn’t have been. Because the fact is, recessions happen all the time. The U.S. economy moves in cycles, with years of economic growth followed by years of decline. It’s like the cycle of seasons in the TV show “Game of Thrones”: summer can last for years, but there’s always another winter. 

In the same way, even when the economy seems to be booming, another recession is always on the horizon. It’s impossible to predict exactly when the next recession will hit, but there’s no question that it will come.

How to Prepare for a Recession

If you want to make sure the next economic slump doesn’t harm you or your family, follow the example of House Stark in the show. Its motto, “Winter is coming,” warns that even in the middle of summer, you always need to be planning for the next winter. 


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Just as the people of the northern kingdom spend the summer preserving their harvest, you can take advantage of an economic boom to shore up your personal finances. That way, when the next downturn hits, it won’t take you down with it.

1. Build an Emergency Fund

If you find yourself suddenly out of a job or trying to get by on a lower income, an emergency fund can get you over the rough patch. If you don’t have an emergency fund, now is the time to start one. If you do have one, consider building it up a bit more.

Experts typically recommend keeping enough money in your emergency fund to meet all of your expenses for three to six months. However, if you’re worried about a possible recession, up to a year’s worth of expenses isn’t excessive. 

The bad news is, most Americans don’t have this much saved up. According to a 2021 Bankate poll, more than half of Americans don’t have three months’ worth of emergency savings, and 25% have none at all. If you’re part of this group, adding to your emergency fund should definitely be a top priority.

Crunch some numbers to figure out how long your savings would last in different situations. For instance, if you lost your job but still had your side income, how much would you have to pull out of your emergency fund each month to pay your bills?

If you can’t figure out how to come up with the cash to start or add to your emergency fund, look for hidden budget busters you can cut back on to save money. You can also direct any cash windfalls, such as a tax rebate, to your emergency fund. 

To make the most of your savings, stash the cash in low-risk investments that earn more than a basic savings account, such as online bank accounts or CDs


2. Cut Your Expenses

When you’re trying to get through tough times, how much money you have is only one side of the equation. The other side is how much you spend. The less money you need to pay the bills, the longer you can keep yourself going with just your side income and emergency savings.

If you can get into the habit of living on a tight budget now, you won’t have to make painful changes in your lifestyle if your income suddenly drops. And in the meantime, you can use the extra money to build up more savings or pay off debts, freeing up still more cash in your budget. 

Here are a few suggestions:

  • Make a Budget. If you don’t already have a household budget, make one now. It will show you where your money is going and help you figure out where you can cut back. Budgeting programs, such as Tiller or You Need A Budget (YNAB), can help.
  • Go Contract-Free. If you’re locked into contracts for services like your cell phone, TV, or Internet, you can’t easily cut these expenses at a moment’s notice. But as these contracts expire, you can replace them with contract-free alternatives. Try a cheaper cell phone plan without a contract, such as Ting. You can also ditch your cable TV for a less costly streaming service or drop your gym membership and work out at home for free.
  • Lower Your Utility Bills. Look for ways to reduce your utility bills by saving energy at home. Switch to energy-efficient light bulbs, add weatherstripping, or wash clothes in cold water. You can also cut your water bill with water-saving strategies like fixing leaky faucets, taking shorter showers, and choosing drought-resistant plants for your yard.
  • Kick Your Bad Habits. Cutting out or cutting back on bad habits like smoking, drinking, and gambling can save you hundreds or even thousands of dollars. For instance, if you smoke a $10 pack of cigarettes every day, quitting would save you over $3,500 a year.
  • Slash Your Food Bill. If you eat out a lot, save money on food by cooking at home more often. Save money at the grocery store by stocking up during sales, downloading apps like Fetch Rewards or Ibotta, using coupons, and making a price book.

3. Create Extra Income Streams

In a recession, employers tend to cut back on bonuses and overtime hours. To make sure you can get by without them, look for ways to earn extra income on the side. Having multiple income streams gives you more wiggle room in your budget and helps you get by if you lose your job.

Possible sources of extra income include:


4. Stick to Your Investment Strategy

Often, one of the first signs of a recession is a plunge in the stock market. So, if you fear a recession is coming, it’s tempting to pull out of the stock market entirely and protect your assets. 

However, this strategy can backfire. Since there’s no way to predict when a crash will happen, you could end up missing out on big gains instead. And even if you pick exactly the right moment to get out of the market, you won’t be sure when is the best time to get back in.

It makes more sense to stay the course with an investment strategy that works for you. Adjust your asset allocation — that is, the share of money you keep in stocks and other investments —  to fit your current level of risk tolerance. Then keep it that way, no matter what the market does.

For instance, if you’re right on the verge of retiring, you’ll probably want to keep a good chunk of your investment portfolio in cash and bonds. That way, you’re guaranteed to have money to fund your retirement when you need it. Many financial planners recommend keeping half your portfolio in cash and bonds and half in stocks after age 60.

If you’re younger, you can afford to keep most of your retirement savings in stocks. Even if the market crashes, it will have plenty of time to recover before you retire. If you’re not sure what balance of stocks and other investments is right for you, talk to a financial planner.


5. Diversify Your Investment Portfolio

There’s no such thing as a “recession-proof” portfolio. However, a diversified portfolio is always safer — both in a recession and at other times. 

Diversification means, as the old saying goes, not putting all your eggs in one basket. By splitting up your eggs (investments) among different baskets (assets and asset classes), you limit the amount of money you can lose if one of the baskets crashes.

There are many types of assets you can put money into, such as stocks, bonds, real estate, precious metals, commodities, and foreign currencies. It’s particularly useful to split up your money between pairs of assets that balance each other out. 

For instance, bonds tend to go up in value when stocks go down, and vice versa. That means if you have some money in stocks and some in bonds, a drop in the stock market means your bonds will rise in value, balancing out the loss.


6. Improve Your Credit Score

During a downturn, it gets harder to borrow money. Lenders are cautious about making loans because they’re afraid borrowers will default. To make up for this risk, they charge higher interest rates.

That makes it more important than ever to have a good credit score. If your credit is poor, you’ll certainly face high interest on credit cards and other loans, such as mortgages. And there’s a risk you won’t be able to qualify for new loans at all.

By improving your credit score now, you’ll increase your odds of being able to borrow later if you need to. Ways to boost your credit include:

  • Finding and fixing errors on your credit report
  • Paying bills on time
  • Paying balances on credit cards and loans
  • Keeping old credit accounts open 

7. Pay Down High-Interest Debt

It’s easier to survive a recession if you have less debt. Debt is a real drag on your budget, an expense you have to keep paying every month that gets you nothing in return. By paying off debt now, you’ll be in better shape to ride out a recession when it hits.

The most important debts to pay off are high-interest debts. For most people, this means credit card debt, which carries a higher interest rate than most other loans. More than 45% of all Americans carry a credit card balance, with an average balance of over $6,000. And as of May 2022, the average interest rate on that debt is around 14.5%.

Strategies for paying off credit card debt faster include:

While it’s helpful to pay off your credit cards, that doesn’t mean you should close them. Ideally, you won’t need to run up a balance again, but it’s good to have the option of falling back on them if money ever gets tight. And as noted above, keeping them open helps your credit score.

In fact, if you don’t currently have any credit cards or other lines of credit, now is probably a good time to open one, while banks are still eager to lend. Once the recession hits and credit tightens up, it could be too late.


8. Improve Your Employability

When a recession hits, employers often scale back staff. As the unemployment rate rises, you face a greater risk of job loss and a lower chance of finding a new job. No matter how secure your job seems right now, it pays to prepare yourself for the possibility of a harsher job market. 

Take the Plunge on a New Job

If you’ve been thinking about changing jobs, the best time to do it is while the economy is healthy. Finding a new job will be much harder once a downturn starts. 

Also, if you find a new job now, you can hope to be firmly settled in at your new workplace by the time the recession hits. This reduces the chance that you’ll be the first to go in a round of layoffs.

If you’re considering going further and making a career change, this will also be easier to do when the economy is strong. You’ll have a better chance of finding a job in your new field when jobs are plentiful. If you wait until a slowdown starts, you’ll face a lot more competition.

Update Your Resume

Even if you’re not looking for a job right now, keep your resume up to date so it will be ready to go if you need it. A good resume can be the difference between getting the interview or getting passed over for someone else. 

To create an effective resume, use a clear format and a concise style, keeping it to one page. Include your work history, skills, and achievements. Don’t forget to proofread, as nothing makes a bad impression like errors in spelling or punctuation. 

Your resume should also include a couple of references from people you’ve worked with. If your current references are a few years old, get in touch to update their contact information and to make sure they’re still OK with being used as references. See if you can add at least one newer reference, as well, so employers will know you’re still doing well at your present job.

Once your resume is up to date, consider posting it on a few job search sites to make it easier for potential employers to find you. Good places to put it include ZipRecruiter, Monster, and Jobseeker. Make sure your profile on LinkedIn is up to date, too.

Network

Even in the modern world, most people find their jobs through good old-fashioned networking, or talking to colleagues, acquaintances, and friends who know about job openings. According to CNBC, anywhere from 50% to 80% of employees find their jobs this way. 

Networking isn’t something to do only when you’re job-hunting. People are more likely to help you if they already think of you as a friend than if you only reach out to them when you want their help. Reconnect with old friends now, perhaps through social media, and they’ll be more willing to lend you a hand when you need it.

At the same time, try to expand your network by forming new connections where you can. Seek out groups and events that can help you meet highly placed people in your field who could be in a position to offer you a job someday. 

Attend industry meetings and keep an eye out for colleagues at alumni gatherings and social events. Develop an elevator pitch — a 15- to 30-second summary of who you are, what you do, and what kind of jobs interest you. Be ready to trot it out when you meet new people. 

Seek Job Training

When jobs are scarce, employers can afford to be picky and seek out, or hold onto, only the best workers. You can improve your career prospects by beefing up your job skills now.

Seek out additional training or certifications that will make you a more desirable employee, either in your current field or in a new one that interests you. This will help you hold onto your job if there are layoffs down the road, or find a new one if you need to. 

It’s much easier to devote time and money to training when you have a job than to scramble to boost your skills when you’re out of work.


9. Get Your Insurance in Order

One of the best ways to protect yourself in a recession is to carry enough insurance. A healthy emergency fund can’t help you if all your savings are at risk of being wiped out by an auto accident, house fire, or major illness. 

There are four major kinds of insurance you need to protect you and your family from this kind of financial disaster: auto, homeowners, health, and life insurance.

Auto Insurance

All auto insurance policies provide liability coverage, which protects you from being sued if you’re at fault in an accident. You can add collision coverage and comprehensive coverage to pay for damage to your own car from accidents and other causes, such as theft.

Liability insurance protects your assets, so the more money you have, the more coverage you need. If you’re young and broke, you only need the minimum. But if you own a home and other investments, your liability insurance should cover the value of these assets so you can’t lose them in a lawsuit.

As for collision coverage and comprehensive coverage, they never pay out more than your car is worth. To figure out how much you need, use a site like Kelley Blue Book to estimate your car’s value and aim for somewhere around that amount.

Keep in mind that if your car is quite old, its value could be so low that this insurance isn’t worth the cost of the premiums. If you’re paying at least 10% as much per year for this coverage as you could get back when making a claim, it’s probably time to drop it.

Homeowners Insurance

Unlike auto insurance, homeowners insurance usually doesn’t let you pick and choose what coverage you get. Every policy protects both your dwelling and its contents against major disasters like fire, theft, and storm damage.

However, you can choose the amount of coverage. Make sure you get enough to cover the full replacement value of your house — that is, the amount it would take to rebuild it if it were destroyed. 

Your insurer will usually suggest a replacement value for your home, but you can double-check their figure using a site like Cost To Build. Creating a home insurance inventory will help you figure out how much coverage you need for your personal belongings.

If you don’t own your home, you don’t need to cover the cost of rebuilding it. However, it’s worth looking into buying a renters insurance policy to cover your personal property against theft or damage.

In either case, compare offers with an online insurance broker like PolicyGenius to confirm you’re getting the best rate.

Health Insurance

Health care is expensive, and a single major medical crisis could easily wipe out all of your savings. According to United Healthcare, the average total cost of an emergency room visit is over $2,000. That’s why you need health insurance.

If you’re self-employed or work for a very small company that doesn’t have a health plan, the best place to look for insurance is the state health exchanges created by the Affordable Care Act, otherwise known as Obamacare. 

You can buy a policy on the exchanges during the yearly Open Enrollment period, or at any time if you’ve had a “special event” such as losing your previous coverage. Visit Healthcare.gov to find the exchange for your state.

If the prices on the exchange look high, don’t panic. Depending on your income, you could qualify for a subsidy that will cover much of the cost. If you don’t, try looking for a “bronze” policy with lower premiums. It’s not perfect, but it covers the basics.

Life Insurance

Unlike other kinds of insurance, life insurance doesn’t protect you from loss; it protects your family. In the event of your death, your life insurance policy will provide them with the money they need to pay for your funeral and make up for the lost income you can no longer provide. T

Thus, you only need this coverage if you have people who depend on your income. If you’re young and single, or if you’re financially independent and all your kids are out on their own, you can manage without it.

If you decide you need life insurance, the next question is how much. One common rule of thumb is that you should take out a policy worth 8 to 10 times your annual salary, which will provide your family with at least 8 to 10 years’ worth of living expenses. 

If you think that’s not enough, you can multiply your salary by the number of years you have left until retirement. That amount will make up for all the income you would have brought in if you’d lived. Life insurers like Ladder may have free calculators to help you figure out how much coverage you should have.

There are two kinds of life insurance. Term insurance covers you for a specific amount of time, while permanent or whole life insurance combines insurance with an investment that builds value over time. 

Whole-life policies cost a lot more, so if all you want to do is protect your family, a term policy is your best bet. Choose a term that matches the number of years you have left before retirement. After that, your family won’t need your income, so you won’t need the policy anymore.


Final Word

Planning for a recession is just like planning for a natural disaster. You can’t prevent a hurricane or earthquake, but you can outfit your home to prevent damage and stock it with supplies to get through the crisis. Likewise, you can’t prevent a recession, but you can make your financial life as secure as possible against its ill effects. 

Since you can never be sure exactly when the next recession will hit, the best time to prepare for it is right now. By the time economists start declaring that we’re officially in a recession, it’s too late to start seeking out job training, paying off debts, or building up your emergency fund. 

By doing these things when you have the chance, you’ll improve your ability to ride out an economic downturn without any serious financial pain.

Amy Livingston is a freelance writer who can actually answer yes to the question, "And from that you make a living?" She has written about personal finance and shopping strategies for a variety of publications, including ConsumerSearch.com, ShopSmart.com, and the Dollar Stretcher newsletter. She also maintains a personal blog, Ecofrugal Living, on ways to save money and live green at the same time.

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